The first multinational emission trading system for large emitters – the European Emission Trading Scheme (EU ETS), was established on 1st Jan 2005. Until now the EU ETS exists for more than seven years and is by far the biggest trading scheme for GHG emission allowances in the world.
Over 12,000 European power stations and industrial plants in 30 countries are required to measure and record their CO2 emissions since the beginning of 2005 and millions of European Allowances (EUAs) are allocated to them each year. The EU ETS is based on the “Cap and Trade” principle. The “Cap” means that the total amount of the GHG emission from the participating companies is limited. In order to keep their emission level within the cap, the companies could either reduce their emissions or buy additional EUA. The emission reduction units from JI projects, called ERUs, and CDM projects, called CERs, can also be used for compliance. Off course, if companies have surplus certificates, they can either keep for their future needs (banking) or sell them. In April of each year each participating company has to surrender sufficient certificates to cover their total emissions in order to avoid paying heavy fines.
The EU ETS is composed of three trading phases. The Phase I was from 2005 to 2007. During this period 100% of allowances were allocated to the participating companies for free. The Phase II is from 2008 to 2012. In average, companies can receive free allowances to cover almost 90% of their overall CO2 emission and have to cover the other 10% through auctions, brokers, exchanges or CDM/JI projects. The third phase is from 2013 to 2020. During this phase there will be tighter limits on the use of offsets concerning amount and project types. By 2013, 30% of allowances should be obtained by auction, and by 2020 up to 70% of allowances is expected to be gained through auction. In the marketplace, there exist different trading instruments, such as spot, swaps and forwards.
Under the following circumstances EU ETS companies may exchange their excess 2008-2012 CERs for allowances valid after 2012:
– CERs from CDM projects registered before 31.12.2012
– CERs from CDM projects registered post 2012 in Least Developed Countries (LDCs)
– CERs from CDM eligible project types generated before 2013